Slow auctioning of collateral is making loans more expensive

Clients being served in the banking hall of a local commercial bank. Both the central bank and commercial banks have raised concern over the cumbersome process to auction collateral from loan defaulters, with some saying it is one of the factors that keep loans very expensive. / Emmanuel Kwizera

The process to auction property in the event one is unable to pay off a loan is currently slow and, if not checked, could negatively affect the stability of local banks.

This is a concern troubling the industry regulator, the National Bank of Rwanda, local banks and sector experts. It is believed that this has partly led to higher lending rates.

The process to foreclose on the collateral is currently slow and the Central Bank says that it poses a risk to the financial sector if not checked.

During last week’s Financial Stability Committee meeting chaired by Central Bank Governor John Rwangombwa, the subject featured prominently with the committee resolving to advocate for necessary policy reform.

At the moment, in the event a bank client is unable to pay a loan and the bank intends to auction on the collateral, it involves a lengthy process which among other things seeking authorization from the Rwanda Development Board.

According to a number of bankers, the process on average takes over one year, is unpredictable and often has unwarranted interruptions.

Ordinarily, in the event one is unable to pay off a loan, the collateral is auctioned following the approval of the Rwanda Development Board.

However, in some instances bank clients often go to court to stop the process it leads to months of court cases further delaying the process.

In other instances, the loan defaulters file for insolvency which often leads to the property being put under receivership or administration, consequently impeding the auction.

Peace Uwase, the Director General of the Financial Stability department at BNR, told The New Times that the process is problematic when expected sales are interrupted by unwarranted court process, minor administrative issues or seeking an escape route through the insolvency law.

“Much collateral is realized after more than five attempts, or even more than 10 attempts,” she said.

Noting that it often takes up to 100 days and more to recover some the collateral, she said that it drives up the cost of recovery which, coupled with the delays, results into a greater credit risk which subsequently keeps lending rates high.

“The implication of this is that the cost of realisation of collateral is high, so this high cost, combined with the delays, translates to greater credit risk and, therefore, is one of the factors keeping lending rates relatively high,” she said.

A number of bankers who spoke to The New Times said the process is often unnecessarily time consuming as it is interrupted by administrative suspensions due to various reasons.

Desire Rumanyika, the Chief Operating Officer of Bank of Kigali, said that among reasons that lead to the delay of the process include administrative suspensions of public auctions where defaulters argue that their assets (collaterals) were undervalued.

He added that the suspensions also come about when defaulters take legal actions against the accuracy of the amounts owed to the bank or file for insolvency.

Such tricks and tactics often have seen the process take years which has been driving up the cost of risk and consequently the cost of lending.

“All the above challenges affect negatively the recovery processes; banks are required to keep provisions to cover the potential losses until they recover the amounts in default. As a result, the cost of risk increases, driving up the lending interest rate,” Rumanyika said.

Rumanyika said that it is important that sector stakeholders review the process to identify loopholes in the foreclosure process and find a way to curb the delay tactics.

Bank teller counting Rwandan money in one of commercial banks in Kigali. / Emmanuel Kwizera

Maurice Toroitich the Chief Executive of BPR, told The New Times that the process ought to be amended to give creditors (including banks) the statutory power of sale of assets via public auction subject to certain rules, like statutory notice.

Toroitich, who is also the Chair of Rwanda Bankers Association, said that as is practice in other developed markets, the situation could be salvaged by giving creditors the statutory power to put companies into receivership status in case of default.

This, he said, is a standard practice in most developed financial markets as opposed to the present status whereby the process is subject to Registrar of Securities’ intervention before a creditor moves in to foreclose in case of default.

“There is always a notion that banks may act inappropriately in case of such powers but I have to point out that banks are already subject to strict regulation by the Central Bank and, therefore, can be reasonably expected to adhere to the set rules for foreclosure.

“Secondly, it must be noted that the primary responsibility of banks is to safeguard depositors’ money and so they should be empowered to move quickly to recover depositors’ money from people who borrow and fail to pay,” he added.

If not addressed, he said, banks may no longer have trust in securities taken for loans issued as there will be no guarantee banks can realise the value of securities.

“Banks may also decide to impose stiffer loan conditions to safeguard themselves from losses, which could reduce lending to the market,” he said.

Others say that solving the stalemate ought to go beyond the process of sale of collateral to the delays and unending court cases.

George Odhiambo, the KCB Rwanda Chief Executive, said one of the root causes is the underwriting process with overvaluation of collateral being a common place.

He said that it is common to find collateral overvalued during the loans application process, which later results into disputes when the borrower defaults.

Among other things, he said, efforts to improve the situation should include improvement of skills and professionalism of valuers.